Consumer Spending Drops and So Does the Market

Pre-market futures are down sharply on a poor Retail Sales report. The SPY is set for another big gap, this time to the downside. The headlines are mostly reading "Retail Sales Unexpectedly Fall" but that shouldn't be news to you, even if it is news to the media. The main number reported at -0.4% vs. 0.0% expected. More damaging, however, was the Retail Sales ex-auto, which reported -0.5% vs. 0.2% expected. That's a pretty wide miss, although it's only a wide miss because analysts were expecting U.S. retail sales outside of auto purchases to actually be positive. Those of you following my chatter for the past several weeks know that I've been yapping about rising gas prices and rising unemployment, and that ain't exactly a good recipe for positive consumer spending.....

Oh, and just for good measure, the prior month's Retail Sales were adjusted down. If your keeping score at home, this is Meredith Whitney 1 and Alan Greenspan 0. This is exactly what she warned of in her CNBC commentary two days ago.

Here is a chart of the SPX:
(click on image to enlarge)

The SPX is set to open right at yesterday's low in the 896 area, which is not a coincidence, the market makers know exactly what they are doing. There may be a little wiggle out of the gate after such a huge gap, but I think today is the kind of day where fear may be a little stronger than googly-eyed dip buying. Traders will see the 870 - 880 price zone on the SPX as the next obvious support. The 20dma is towards the top end of the zone and the 1/4 Fib retracement is at the bottom end of the zone. That's the target area for today and tomorrow.

Here is a chart of the SPX with the Moving Averages and Fibonacci's:
(click on image to enlarge)

The market has a good probability of treating the low side of the gap on the SPY and the 900 area on the SPX as resistance. A move above 903 would be a red flag for the bears. A move above the 905 - 907 area and the market is probably headed for a range-bound chop day. And a move above 914 and the market is probably headed for the 930 area again.

7:38 am MT: The highest probability move is towards the 870 - 880 support level. The market is selling right out of the gate, so what I speculated above is correct, the fear out there is stronger than the enthusiasm for dips. If you didn't catch puts on something right out of the gate, and your wanting to participate in this counter trend pullback with a short, quick trade, then wait for a wiggle back towards the gap (on the SPY). There will probably still be some dip-buyers who will be "thinking forward" (at least in their own minds) and reasoning that the worst is behind us.....after all, Alan told us so yesterday. It will probably be the same traders that bought the market vigorously late in the day yesterday after the whopping 3% pullback on the SPX.

If the market does Bear Flag a bit on the 5m - 10m charts, then it's a put buying opportunity, but remember that the overall trend is still bullish, so don't get too loaded up. Nevertheless, the highest probability scenario is a consolidation to the 870 - 880 area on the SPX. We shall see.....

8:05 am MT: The market is wiggling back a bit, so this is a small nibble area. I would normally get a little bigger put position here, but this market is still saturated with googley-eyed dip-buyers and it's not worth the risk of getting a larger position until it looks like the dip-buyers are done. If the market bases for awhile in this area, I will stand back a bit because it could have another buying spike similar to yesterday. Watch the resistance red flag areas I posted above. After writing all this, I still put the probability at about 60/40 for a move down on the SPX into the 870 - 880 area over the next several days. We shall see part deux.....

8:16 am MT: Here comes the dip-buying. This is the wiggle back to the gap (on the SPY) I was watching for earlier. The 896 - 900 area is the first resistance zone on the SPX. That's the best put entry area. If the market goes much beyond the 903 area then the bears will be tasting the pukes in their mouth and probably spit out their shorts, so that's the first red flag area. This is all going to play out how it plays out, so I don't want to over-comment on every wiggle in the day. We shall see part trois.....

11:44 am MT: The first dip-buying wiggle ended up forming a perfect Bear Flag on the 15m charts right into the resistance zone. So the put opportunity has played out very well. I speculated 880 was the first support area down and the SPX has made it all the way to 882.80. At this point you will want to take partial profits on your puts. The dip-buyers think they're a clever lot, so if they dip, then they will do it a little bit ahead of the technical level. However, despite the dip-buyers efforts, the river is still flowing downhill, so the SPX will probably still consolidated down into the 870 - 880 zone.

Here is a 15m chart of the SPX showing the Bear Flag highlighted in yellow. That was the area I outlined this morning as a good put buying opportunity:
(click on image to enlarge)

11:55 am MT: The SPX (market) is experiencing its most pronounced dip-buying of the morning now, as I speculated a few minutes ago. However, I still think the probabilities are 60/40 (and even a little higher now) that the SPX consolidates into the 870 - 880 zone. So if you locked some profits near the 883 lows and tightened your stops on what you have left, still keep an eye out for one more good bearish price formation on the 15m - 30m charts. The SPX may have one more leg down into the end of the day. The dip-buyers are swimming against the tide, they just don't know it yet.

12:27 pm MT: The market continues to hold the 883 - 885 area. There are a few dip-buyers that are getting a bit excited in this spot, which may cause a little basing here intra-day. I speculate that if the market pops up from this area, the SPX will probably go as far as the 892 - 894 area, but the bears will likely come in and sell the market into the close. The internals show a lot of selling even on these intra-day bear flags or little mini-bases, so like I said a few minutes ago, the dip-buyers are swimming the wrong direction, even if there are enough of them to create a noisy bump right now. In the bigger picture, I still see the higher probability of the SPX consolidating down to the 870 - 880 area, although it may not happen today.

1:14 pm MT: The dip-buyers were overwhelmed again and the market is fading. The SPX will probably go to new lows in the next 15m or so. The internals keep selling, and selling hard. It's tough nowadays to have a momentum day to the downside because of the news manipulation and the googley-eyes, but today looks like a momentum day to the downside.

1:57 pm MT: The market will probably close at or below the lows of the day. The technical pattern suggests a further consolidation tomorrow on the SPX into the 870 - 880 area. The only real blip on the economic radar screen will be Weekly Jobless Claims in the morning. The PPI report tomorrow will probably be largely insignificant. WMT has earnings in the morning as well. It's possible that WMT, which is where bargain shoppers shop during tighter economic times, will have better than expected earnings. It's also possible, because of the government census hiring, that the Weekly Jobless Claims will beat expectations. If those two things happen tomorrow then the market could punch back up early in the day off of the euphoria and rapture of the dip-buyers. Overall, though, the market is in a clearly defined technical pullback that is forecasting a further consolidation to 870 - 880.